By Supantha Mukherjee and Liana B. Baker
(Reuters) - Avago Technologies Ltd (O:AVGO) agreed to buy Broadcom Corp (O:BRCM) for $37 billion (£24 billion) in the largest chip industry deal ever, turning a lesser-known company run by a ferocious dealmaker into a rival to the biggest in the field.
Avago, a maker of chips for the wireless and industrial markets, is offering Broadcom shareholders $17 billion in cash and Avago shares valued at $20 billion.
The deal is the biggest so far by Avago Chief Executive Hock Tan, who has grown a small chipmaker into a $36-billion company through acquisitions since taking the helm nine years ago.
Tan, known as a serial deal-maker who thinks like a private equity executive, has trimmed Avago's portfolio by divesting units while bulking up in faster-growing areas.
The Broadcom deal, which will create the third-largest U.S. semiconductor maker by revenue behind Intel Corp (O:INTC) and Qualcomm Inc (O:QCOM), is the second big one in the industry this year and is not likely to be the last, analysts said.
The deal represents a premium of about 28 percent, according to Reuters calculations based on Broadcom's market value of $28.85 billion as of Tuesday's close, the day before the Wall Street Journal reported that the companies were in talks.
Demand for cheaper chips and new products to power Internet-connected gadgets is driving consolidation in the industry.
"I think it makes sense for companies to be aggressive now because there are a limited number of properties out there and I think the guys that are being more aggressive now have the best opportunities to get the best of what's available," Raymond James analyst Steven Smigie told Reuters.
Pacific Crest Securities analysts said Qualcomm could also bid for Broadcom, noting that the company recently filed a shelf registration for an indeterminate amount.
MORE DEALS?
Other chipmakers such as Xilinx Inc (O:XLNX), MaxLinear Inc (N:MXL), Intersil Corp (O:ISIL), Cavium Inc (O:CAVM) and Atmel Corp (O:ATML) could be acquisition targets, analysts have said.
The Avago-Broadcom deal follows NXP Semiconductors ' (O:NXPI) $11.8 billion offer to buy Freescale Semiconductor Ltd (N:FSL) in March. Avago had also bid for Freescale, people familiar with the matter said at that time.
Reuters, citing sources, reported in March that Intel was in talks to buy chipmaker Altera Corp (O:ALTR) in a deal that could top $10 billion.
Until Thursday, Avago's biggest deal was for chipmaker LSI Corp, which it bought for $6.6 billion last year.
Tan's strategy has been to look at potential targets that do not necessarily have the best strategic fit but have potential to eliminate costs to build value.
Avago and Broadcom first spoke about a potential merger in October 2014 but could not agree on price, according to people familiar with the matter.
Talks heated up in April when Avago approached Broadcom again with a few higher offers and negotiations continued until the two agreed on a deal, the people said.
BARGAINING CHIP
The deal will also help the companies improve their bargaining position with manufacturers.
After the deal the combined company would be named Broadcom, sources close to the deal told Reuters.
Irvine, California-based Broadcom makes semiconductors for a variety of products, including set-top boxes, cellphones and network equipment.
The company is best known for its connectivity chips, which are used widely in smartphones made by Apple Inc (O:AAPL) and Samsung Electronics (LONDON:0593xq) Co Ltd (KS:005930).
But Broadcom has been struggling to grow amid intense competition in the mobile chip business, and the company's revenue increased by just 1.5 percent last year.
Broadcom's shares were down 2 percent at $55.80 in afternoon trading, while Avago's were down 0.5 percent at $141.03. Broadcom rose as much as 23 percent on Wednesday following the Journal report, while Avago rose as much as 10 percent.
The companies said they expected to close the transaction by the end of first quarter of 2016 and save $750 million in costs within 18 months. The deal has a breakup fee of $1 billion, according to a source familiar with the matter.
The combined company, to be based in Singapore, would have annual revenue of $15 billion and an enterprise value of $77 billion, the companies said in a statement.
Broadcom shareholders will own about 32 percent of the combined company. They would also have the option to choose between various combinations of cash and stock.
Avago, which is incorporated in Singapore and has dual headquarters there and in San Jose, California, said it intended to fund the cash portion of the deal by using funds from the combined companies and a new debt of $9 billion.
Avago was advised by Deutsche Bank (DE:DBKGn), Bank of America (N:BAC), Barclays (L:BARC), Citigroup (N:C) and Credit Suisse (VX:CSGN).
Broadcom was advised by JPMorgan Chase (N:JPM), while Evercore served as financial adviser to the Special Committee of the board.
Skadden, Arps, Slate, Meagher & Flom LLP is the legal adviser to Broadcom. Broadcom co-founder Henry Nicholas was advised by Centerview and Morrison & Forester.